Unit 4: The Global Economy

Economic development is a more multidimensional concept than economic growth. Economic development requires, for example, improvements in living standards or welfare alongside economic growth.

Single indicators

National income indicators (GDP per capita and GNI per capita)

Gross Domestic Product (GDP) per capita measures the total market value of all final goods and services produced by all factors of production residing in an economy in one year, divided by the mid-year total population of the country.

GNI per capita is GDP plus net primary income received from abroad, divided by the population. It measures income accruing to residents, rather than nationals. Net primary income includes compensation of employees and property income received from non-residents, less corresponding payments to non-residents.

In general, GNI per capita is the preferred indicator to GDP per capita in development economics, because income produced by domestic assets that belong to foreigners contributes less to the well-being of the domestic population.

In particular, if a country’s GNI per capita < GDP per capita then either:

(a) There is a debt owed to foreign creditors

(b) Productive assets are owned by foreigners

Many LEDCs have lower GNI per capita levels compared to GDP per capita levels, reflecting a high level of indebtedness and foreign ownership of productive assets. MEDCs, on the other hand, tend to have higher GNI per capita compared to GDP per capita levels. For instance, developing countries in Sub- Saharan Africa on average have a negative GNI-GDP gap up to 9.4% of GNI, while developing countries in Latin America have on average a negative gap of 10.5%. In contrast, OECD countries have on average a positive gap of 1.2%. This can partly be attributed to reckless lending to developing nations in the 1970s; many LEDCs are still living with the consequences of international debt incurred from that time.

GDP per capita vs. GDP per capita at purchasing power parity (PPP)

As countries have differing costs of living, the cost of living discrepancy needs to be equated across countries to enhance meaningful comparison of living standards across countries. Purchasing power parity (PPP) equates the cost of living across countries. When national income is measured at purchasing power parity (PPP), it is converted into “international dollars”. One international dollar has the purchasing power equivalent to one US dollar in the US.

Developing countries tend to have higher GDP per capita when measured at PPP because living costs in developing countries are lower than those in developed nations; they tend to have lower prices for similar goods.

If per capita national incomes are directly compared after converting them to a common currency (such as the US dollar) at market exchange rates, national income figures in developing countries tend to understate the number of goods and services that could be purchased.

Health indicators

(1) Life expectancy at birth

Life expectancy means the statistically expected number of years of life remaining at birth. It reflects mortality rates, the prevalence of diseases and the level of medical services in countries, and varies greatly between MEDCs and LEDCs. For instance, in 2010 the life expectancy at birth for females in high-income countries was 82.6 years, while in Sub-Saharan Africa it was 55.3 years. Lesotho has the lowest life expectancy at 46.6 years.

(2) Infant mortality rate

Infant mortality rate measures the number of infants dying before reaching one year of age, per 1000 live births in a given year. It is related to the prevalence of health problems affecting infants such as diarrhoea, pneumonia and malnutrition. According to the World Bank, the average rate was 5.4 in high-income countries, and 69.7 in low-income countries.

Education indicators

(1) Literacy rate

Literacy rate measures the percentage of the population that can, with understanding, read and write a short, simple statement on their everyday life. This often includes numeracy, or the ability to understand and use numbers. In MEDCs, nearly all of the population have at least basic literacy; the adult literacy level in high-income countries was 98.4% in 2009. In contrast, in LEDCs the average rate was 61.4% in 2009.

(2) Primary school enrolment rate

Primary school enrolment rate measures the proportion of children at official primary school age who are enrolled in primary school. In MEDCs, this ratio is consistently at about 95%. Although there is a gap when the ratios of LEDCs and MEDCs are compared, there has been a significant improvement in the last decade. In 1999, the primary school enrolment rate was 59.7% for low-income countries; this has since increased to 79.8% in 2009.

Economic/social inequality indicators

These include measures like the distribution of income and wealth, such as the Gini coefficient, pay inequality, asset ownership, and access to credit.

For example, the UK’s Gini coefficient in 2020 is 0.35, whereas India’s around 0.45.

Energy indicators

There are various different ways to define ‘energy poverty’. One common definition is the inability to maintain the household at an adequate temperature, or the inability to provide essential energy services to ensure decent living conditions.

We can therefore compare levels of ‘energy poverty’ by looking at indicators like the access to electricity.

Environmental indicators

There are many different environmental indicators. Some examples include levels of greenhouse gas emissions, intensity of use of forest resources, and the level of desertification.

Composite indicators

There are multiple aspects of economic development, and one single indicator cannot capture all aspects. The most widely-used composite indicator is the Human Development Index (HDI).

Human Development Index

The Human Development Index was developed to “shift the focus of development economics from national income accounting to people centred policies”.

While national income measurements generally have a high correlation with other development indicators, they have a number of shortcomings as a measure of development. On top of national income, HDI also includes health and education in its calculations, bringing the focus to human well-being. Components included in HDI are:

1. Life expectancy at birth
2. Education index (consisting of the mean years of schooling of people aged 25 and older, and expected years of schooling a child could receive if prevailing school enrolment remains the same)
3. GNI per capita (in PPP measure)

HDI is a comparative measure, comparing the components against benchmarks that reflect the component measures of the most highly developed nations. Therefore, the value of the HDI is between zero and one, with zero being the lowest level of human development, and one being the highest level of human development.

Comparing global rankings in national income & HDI

Higher GNI per capita figures contributes to a higher HDI value, as income is one of the components of HDI. In general, the global HDI rankings of countries tend to be consistent with their GDP/GNI per capita rankings.

However, if a country has economic growth that is not accompanied by improvements in education and health, its HDI global ranking is lower than its GDP/GNI per capita ranking. (Conversely, if a country has only a modest income but its population have long and healthy lives and access to education, it's HDI global ranking would be higher than its GDP/GNI per capita ranking.) 

The table below shows the HDI of various countries:

The Gender Inequality Index (GII)

Gender inequality is a major barrier to economic development. Women and girls tend to be discriminated against in areas like health, education, and the labour market.

The Gender Inequality Index (GII) measures gender inequalities in:

1. Reproductive health, measured by the maternal mortality ratio and adolescent birth rates;
2. Empowerment, measured by the proportion of parliamentary seats occupied by women and the proportion of adult men and women with at least some secondary education;
3. Economic status, measured as the labour force participation rate of men and women aged 15 and older.

The higher the value of the GII, the more unequal is the relationship between men and women. The higher the level of inequality, the more likely it is that the country’s economic development will be hampered by it.

The table below shows GII values for various countries.

The Inequality Adjusted Human Development Index (IHDI)

The Inequality Adjusted Human Development Index (IHDI) is similar to the HDI, but takes into account the cost to human development caused by inequality. To measure the IHDI, each of the components of the HDI is adjusted downwards by its level of inequality; in a country with perfect equality, the HDI value and the IHDI value would be the same.

The table below compares HDI and IHDI values for certain countries.

The Happy Planet Index (HPI)

The HPI measures how well countries achieve long and happy lives without damaging the environment. See Section 3.1 for more details.

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Strengths and limitations of approaches to measuring economic development

Single indicators are too specific to capture the multidimensional nature of economic development. We should therefore consider the pros and cons of multidimensional indicators in more depth.

Strengths and limitations of the HDI

The HDI allows us to understand how countries translate their national income into achieving economic development.

However, there are many more aspects to development than those that are included in the HDI, and the HDI is itself an average figure which can mask more inequalities within the country, such as those between rural and urban citizens and between men and women.

Strengths and limitations of the GII

The GII captures gender-related disadvantage in reproductive health, empowerment and labour-market participation. The HDI does not directly show these gender inequalities. The GDI does address gender differences, by comparing female and male HDI values, but covers different dimensions from the GII. As a composite index, the GII can conceal differences between its components and does not measure overall welfare.

Strengths and limitations of the IHDI

The IHDI adds a crucial aspect of economic development to the HDI, making it a significantly better measure.

However, it does not address other issues with the HDI, such as the fact that it does not include factors which are crucial to economic development such as sustainability.

Strengths and limitations of the HPI

The HPI adds a crucial element to economic development; that is, it adds the issue of sustainability. It is a simple, easy-to-understand indicator.

However, the measures that the HPI uses are subjective and personal, meaning that it may not be a reliable indicator for comparison between countries.

Possible relationship between economic growth and economic development

Economic growth is necessary for long-term economic development. Economic growth brings more employment opportunities, increases income and reduces the poverty level, hence increases people’s living standard. Limited scope for economic development can happen without economic growth, for instance, redistribution of existing wealth in the economy can lead to less inequality in the short term.

It is, however, possible to have economic growth that does not lead to economic development. With the four aspects of economic development in mind, economic growth that is incompatible with these aspects does not lead to development. Examples include:

(1) Resource depletion

Economic activity that leads to depletion of resources and damage to the environment is not sustainable. For instance, widespread illegal logging in the Amazon rainforest has a devastating impact on the forest itself, as well as threatening the indigenous residents and destroying flora and fauna in the area.

(2) Economic activity that does not lead to an improvement in living standards

Some forms of economic activity do not result in improvements of living standard for local populations. For instance, income from diamonds mined in countries like Sierra Leone is used to buy weapons, supporting wars in the region.

(3) Economic growth that is grossly inequitable

Income inequality hinders the formation of human capital and can lead to social unrest when the growth in prosperity is not shared by the wider population. Concentration of wealth and income in a small part of the population does not bring improvement to the living standards of the majority of the population.